interest rate even higher than the EPFO’s 8.75 per cent in case they have surplus income to do so.
How the EPFO Works
So here’s the math. For salaried employees, employers deduct 24 per cent of basic wages that are capped at Rs 6,500 per month as contribution to the EPFO. This includes a 12 per cent contribution by the employer that is matched with an equal contribution by the employee.
The employer’s share of deduction is not taxable. Of this 8.33 per cent is contributed to the EPF while the remaining amount is invested in the related Employees’ Pension Scheme wherein workers are entitled to a pension after the age of 58 years, provided the deposits have continued for a period of 20 years.
However, employees can choose to increase the share of their contributions and get more than the mandated 12 per cent deducted from their salaries. All contributions to the EPFO are eligible for deductions under the Rs 1 lakh window provided under Section 80C of the Income Tax Act, 1961.
So even at a starting salary of Rs 25,000 per month and a standard deduction of 24 per cent of your basic salary, by the time you retire at the age of 60, your EPF kitty could have as much as Rs 1.8 crore and your EPS may have a corpus of Rs 2.3 lakh. For the calculations, we have assumed an interest rate of 8.75 per cent and a minimal 5 per cent increase in your PF contribution every year.
Even at the age of 50 years, when you may choose to build a house or marry off your child (for which you can withdraw a part of your savings), your EPF corpus will amount to Rs 63.5 lakh.
The other key comparative advantage of the EPF is that it falls under the exempt-exempt-exempt tax regime. In effect, this means that all contributions (subject to above mentioned limits), withdrawals and interest on these deposits are not taxable.
With the higher interest rate offered this year, there is a slight edge to the EPF compared to the